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What Is Cryptocurrency? | Kiplinger

by Harry Garcia

At the height of the cryptocurrency wave in 2021, investors were drawn to the trendy investment and the promise of blockchain technology. Many jumped in without fully understanding what cryptocurrency is or how it works. The leader in the cryptocurrency market is Bitcoin, which reached an all-time high of nearly $68,000 in November 2021. However, over the next year, it lost 75% of its value as investors lost confidence in high-risk assets due to rising interest rates.

So, what is cryptocurrency? According to Vanguard, one of the largest asset managers in the world, cryptocurrency is a digital asset stored on blockchain technology that serves as a type of currency or store of value. Unlike traditional currencies, cryptocurrencies are not backed by major governments or developed economies. Blockchain technology enables cryptocurrencies to verify transactions between two parties through a decentralized network of users called nodes. These nodes validate and record transactions, eliminating the need for a single authority or middleman.

One of the main reasons to own cryptocurrency is its potential to democratize the global financial system. Proponents argue that decentralized finance takes the power of money creation away from central banks and bankers. Cryptocurrencies are also effective for transferring funds across borders quickly and efficiently, especially in countries with volatile currencies or significant cross-border restrictions. Additionally, some investors see cryptocurrencies as a hedge against inflation. To meet this criteria, cryptocurrencies must provide a store of value, be exchangeable for other assets, and have limited supply increases over time.

There are several advantages to owning cryptocurrency. Cryptocurrency markets operate 24/7, allowing users to buy and sell digital assets at any time. This accessibility is appealing to investors, but its benefits for crypto beginners are debatable. Faster transaction speeds are also critical for the overall adoption of cryptocurrencies. Transparency is another advantage of cryptocurrencies, as their open-source code provides real-time, accurate results for auditors, making it easier for regulators to seize cryptocurrency used in criminal activities.

However, there are also disadvantages to cryptocurrency. As more countries look to regulate cryptocurrencies, there are increasing legal challenges. In June 2023, the U.S. Securities and Exchange Commission sued Binance and Coinbase Global, accusing them of operating unregistered exchanges and offering unregistered securities. This regulatory uncertainty makes investing in cryptocurrency potentially volatile and high-risk.

In conclusion, while the cryptocurrency market is beginning to stabilize, it is essential for investors to understand what cryptocurrency is and how it works. Cryptocurrencies are digital assets stored on blockchain technology that serve as a type of currency or store of value. Blockchain technology enables the verification of transactions through a decentralized network. There are advantages to owning cryptocurrency, such as accessibility, faster transactions, and transparency. However, there are also disadvantages, including regulatory challenges and potential volatility. As with any investment, it is important to do thorough research and understand the risks before diving into the cryptocurrency market.

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